Yield Protocol <> FRAX Proposal (Call for Comments)

Summary

Activate AMO and deploy Frax liquidity to Yield Protocol, a fixed-rate lending and borrowing platform, unlocking an alternative venue for Frax to earn yield.

Background

Yield Protocol is a collateralized fixed-rate borrowing and lending marketplace. Yield Protocol pioneered structuring fixed rate loans as liquid ERC-20 tokens and developed a novel AMM (YieldSpace) for trading the tokenized loans. Yield Protocol launched its Version2 in Oct. 2021 and has seen consistent un-incentivized growth in TVL of the protocol reaching over $20M.

Yield’s fixed rates have been very competitive relative to variable rate borrowing platforms such as Aave and Compound. Current rates have been below 2% for most of the last month. To encourage borrowing, Yield Protocol continues to add new forms of collateral including assets from Yearn and Convex.

Yield Protocol has gone through extensive code reviews and security audits by Trail of Bits, several CodeArena contests, and has an active $500,000 USDC bounty through Immunefi.

Abstract

Users can currently borrow Frax at floating rates on platforms such as Aave and Rari. The unpredictable nature of variable interest rates make borrowing difficult to manage and makes some kinds of borrowing not worth it. Users currently don’t have good ways to borrow Frax at fixed rates.

We propose that Frax partner with Yield Protocol to bring fixed rates to Frax. Yield Protocol can add Frax to its menu of available assets to borrow. This will make borrowing of Frax easier to manage for users since interest rates are locked in for the fixed term.

To make this program a success, we are proposing that Frax provide liquidity through deployment of an AMO to provide liquidity to Yield Protocol. This will guarantee liquidity for the users looking to borrow fixed rates in Frax. The Frax AMO will earn yield from both borrowers and lenders.

In the future, Yield Protocol will add CvxFrax ($3 Billion TVL as of Feb 11th, 2022) as a collateral type, to be borrowable for more Frax. This will allow Frax liquidity providers to take on leverage by borrowing more Frax and unlock more value from their position.

Proposal

  1. Yield Protocol will add Frax as a borrowable asset, enabling the borrowing of Frax at fixed rates. Initial terms will be 3 months and 6 months.

  2. Frax will deploy an AMO to provide liquidity to Yield Protocol, earning fees from lenders and borrowers.

  3. Yield Protocol will add CvxFrax as a collateral type so that it can be used to borrow more Frax, unlocking value and more liquidity for LPs.

Motivation

Revenue: Frax will earn passive yield from borrowers and lenders.

Low risk: Frax liquidity would not be subject to significant impermanent loss. This is true because liquidity is provided in FRAX and fyFRAX. fyFRAX is an asset that matures into FRAX after a maturity date, so a known amount of liquidity can always be withdrawn after the maturity date.

Additionally, Yield has been audited twice and Version 2 has been running without issue for several months.

Exposure: By providing a mechanism for users to obtain Frax at fixed rates, this proposal will grow the utility of the Frax stablecoin and increase the venues through which users can engage with Frax. Since Yield Protocol is a known trailblazer in the fixed rate borrowing and lending space, this would be a great partnership.

What do you think?

We’d love to hear from the FRAX community about this potential partnership and understand any community interest, concerns, or questions.

Links to Audits

6 Likes

This makes a lot of sense to me, let’s do it.

1 Like

do you have a link to the protocols whitepaper? or the app / platform ?

generally speaking i see no downside to this proposal and i would be voting to approve this, but im just wondering how the fixed rate system works.

is the rate agreed at the time the loan is taken out based on supply / demand (like aave) and then the rate is just fixed?
or is the rate agreed when the lender puts up the funds that can be borrowed?

1 Like

This looks like a great! The docs provide a great explanation @sparkes25 Yield Protocol Docs.

I have some questions

  • Would this add Frax on both Ethereum mainnet and Arbitrum?
  • How often are new terms created and what dictates their duration?
  • I see that there are two ways funds can be provided, either by lending or as liquidity. When lending the interest rates are clearly indicated, is there an estimation of the yield generated when providing liquidity?
  • Do you have any ideas/data about what the borrowed assets are used for?

About using CvxFrax as collateral, it causes me just a little bit of concern, because if the users borrow Frax provided by the Frax protocol, it would mean that Frax is backing Frax, unless it has a collateral factor <50%.

Regarless, I’m very supportive of this proposal and would like it very much to move forward!

3 Likes

Thanks for the comment!

Version 2 of Yield Protocol is available at app.yieldprotocol.com.

The fixed interest rate is agreed at the time loan is taken out based on supply and demand and our innovative AMM called YieldSpace (which is used also by Notional Finance, Element Finance, Hifi Finance, Sense Finance, and more)

The whitepaper for Yield Protocol is available here https://yieldprotocol.com/Yield.pdf
The whitepaper for YieldSpace is available here https://yieldprotocol.com/YieldSpace.pdf

1 Like

Thanks for the comment!

We would expect to add liquidity to the mainnet version of Yield Protocol at first. The mainnet version features more assets to borrow and more liquidity in general for users for the best possible experience. After there is sufficient experience doing this, adding it on Arbitrum would make sense as a next step.

Regarding the number of terms, we generally have a “three month or less” and a “six month or less” term available at any given time. We expect in the future to add terms that are further out. The key constraint is making sure that there is sufficient liquidity for longer terms.

The yield generated when providing liquidity is dependent on several factors: the interest rate earned on fyTokens, the amount of trading fees earned, and whether the base asset reserves (Frax in this case) are used to liquidity mine when not being used. We think since Frax would likely want to optimize the markets for borrower liquidity rather than earning significant yield, we would not expect the yields to be very high. It is worth keeping in mind that the risk of loss is essentially zero (not counting smart contract risk).

We expect people to borrow Frax to get leverage. We look forward to working with the Frax community to unlock the best use cases for fixed-rate borrowing of Frax. For example, as mentioned, we could add Frax borrowing against CvxFrax to enable a leveraged form of yield farming with fixed rates.

We are not sure we understand your concern about CvxFrax backing a Frax loan. Maker, for example, permits using Dai LP tokens to act as collateral for Dai. As long as the value backing the loan exceeds the value of the loan, it shouldn’t be a problem.

sounds interesting. more choice for users always a good news. LFG!

ok,i support yield.LFG!!!

Sounds great, hope this day comes sooner rather than later